Rosy economic predictions underlie Obama's budget

WASHINGTON — President Barack Obama's proposed $3.55 trillion budget contains many proposed changes, but one staple of federal budgets didn't change, as he offered rosier economic projections than those envisioned by private analysts.

Buried in the innards of the hefty budget are comparative economic assumptions. The administration spells out the economic basis for its budget projections, then compares them against the forecasts of the non-partisan Congressional Budget Office and a consensus of private-sector forecasters.

Obama projects that the economy will contract by just 1.2 percent this year, swinging to a rapid expansion next year with a growth rate of 3.2 percent. That's quite rosy.

"I'm marveling that somehow they think the recession is over," said David Wyss, the chief economist for New York rating agency Standard & Poor's. "To me, this (budget) is extremely optimistic."

Premium content for only $0.99

While the recent track record of most private forecasters leaves much to be desired, the February Blue Chip Consensus forecast predicts a deeper contraction this year — minus 1.9 percent — and a slower growth rate next year of 2.1 percent.

CBO offers the steepest contraction projection this year, minus 2.2 percent, and the slowest return to growth next year, an anemic 1.5 percent.

The gap widens in subsequent years. In 2011 and 2012, the White House sees explosive growth of 4 percent and 4.6 percent, while the private sector economists see a more sluggish 2.9 percent for each of those years. CBO is closer to the White House in the out years, seeing growth of 4.2 percent in 2011 and 4.4 percent in 2012.

"Even to the 2012 numbers, this looks highly optimistic," said Wyss, who projects 3 percent growth that year.

If Obama's right, it'll make his job of halving the deficit to $533 billion by the end of his first term easier, since more growth means more tax revenues. If Wyss is right, Obama's promises to reduce the deficit won't be met.

The White House and private sector also part ways on inflation expectations, especially in the years beyond the current fiscal year. The administration expects headline inflation — the rise in consumer prices across the economy — to remain at a pleasant 1.8 percent in 2011. Private-sector forecasters see it at 2.4 percent in 2011 and 2.5 percent in 2012, which is still relatively mild, but significantly higher.

This gap in projections is important because economic activity spurs inflation, as businesses gain pricing power and charge consumers more. The Obama budget envisions strong growth and tame inflation, a somewhat unusual but not unheard of phenomenon — it happened in the late 1990s.

Obama's budget also would allow some temporary tax cuts for the wealthiest Americans to expire, effectively raising taxes on the rich. While these tax rates were in place during the 1990s and the economy boomed, it did so largely because of a rapid increase in productivity driven by spreading computer technology.

Returning tax rates on the rich to '90s levels without the accompanying gains in productivity, in an effort to redistribute wealth, could result in a drag on the economy.

"He's going to need a growing economy . . . and tax measures that are aimed specifically at the productive part of the economy I don't think helps," Martin Regalia, the chief economist for the U.S. Chamber of Commerce, said on Thursday.